New Balance of Payments Manual in 2014

Why are changes to balance of payments and international investment position necessary?

In order to ensure international data comparability, the OeNB has to follow international standards for external statistics. The Balance of Payments Manual (BPM) issued by the International Monetary Fund (IMF) defines presentational form, contents and structure for all countries of the world. Based on these benchmarks, external statistics in Europe are regulated in detail for EU member states by the EU commission via a regulation and by the ECB via a guideline on external statistics.

Since the last edition of the Manual, the 5th edition, which was released in 1994, the world economy has undergone considerable change due to new information technologies and the establishment of the free movement of capital. These phenomena, which can be summarized under the term “globalization”, have led to dynamic developments in both world trade and international capital movements, and are accounted for in the 6th edition of the Balance of Payments Manual. The relevant legal acts in Europe have been amended accordingly by the ECB in 2011 and by the EU commission in 2012.

In contrast to BPM5, the 6th edition also comprises international investment position in addition to balance of payment transactions. The most relevant presentational changes relate to foreign direct investment (FDI) and to goods and services. Several nomenclature changes were introduced mostly to increase consistency vis-à-vis national accounting and to better reflect reality. Also, some additions to the list of financial assets/liabilities have been made.

In the EU, the move to BPM6 will take place in the course of 2014. The OeNB will start publishing data according to the new standards for the first time for reporting period 2014 Q2 at end of September 2014. This changeover coincides with another major statistical move in the area of national accounts and financial accounts, where the new European System of Accounts (ESA 2010) will be applied at this point in time.

Changes to goods and services

The goods and services account is eventually the most extensively affected by the introduction of BPM6. For some kinds of services the IMF introduces more detailed breakdowns. These requirements serve the needs of both GATS-negotiations with the WTO and of national accounts where balance of payments is the main source for the rest-of-the-world account in GDP compilation. Economic activity of an enterprise and type of service are better matched and trading via the internet (“e-commerce”) is better reflected. “Charges for the use of intellectual property not included elsewhere” replaces the term “royalties and license fees” in the services account and the outright purchase or sale of patents and licenses is moved from the capital account to research- and development-services. Moreover, charges for the use of intellectual property have to be specified according to the underlying type of intellectual property (trademarks and franchising contracts, computer software, results stemming from R&D activities, artistic rights).

Additional changes expected to bring a major impact are: In BPM 6, “offshoring”, i.e., the relocation of a business process from one country to another is accounted for as a key feature of globalization. In case of outsourcing of parts of the production process abroad (“Manufacturing services on physical inputs owned by others”), the subsequent export and import of the merchandise was recorded under goods in BPM5. Under the new regime, this business case is classified as a fee for the rendering of processing services, because the goods do not change economic ownership. A similar treatment is adopted for the cross-border repair of goods (e.g. maintenance of airplanes). The treatment in BPM6 will reduce gross exports and imports of goods, and will increase exports or imports of services.

In contrast to the treatment of goods for processing, merchanting of goods will be reclassified from services to goods. The purchase of goods is classified as a negative export of goods of the economy of the merchant, and the sale is classified as a positive export of goods, with the difference between sales and purchases having the same effect on the total current account as before.

Cross border insurance and pension services are more explicitly recognized in BPM6. Up to now cross border services in this area were treated in a simplified way compared to domestic services. The more sophisticated method applied in the future entails a more detailed breakdown of the value added of different insurance branches as well as a more detailed compilation of financial assets and liabilities (e.g. insurance technical reserves) based on balance sheet data.

In the treatment of financial sector transactions once more a further harmonisation of balance of payments and national accounts concept is introduced by the IMF. This covers both implicit charges for loans and deposits (financial intermediation services) that will be excluded from interest income and shifted to financial services as well as the margins of financial dealers and market-makers. Dealers in financial instruments may charge, in full or part, for their services by having a spread between their buying and selling prices. These differences had usually not been recognized as a form of service charge transactions.

BPM6 also takes into account trade in CO2 emission rights which have to be recorded as a transfer of assets.

Changes to financial account, international investment position (IIP) and income

Several nomenclature changes were introduced mostly to increase consistency vis-à-vis national accounting, for example the terms “primary income” and “secondary income” are a novelty. “Primary income” corresponds to the concept of ‘income’ plus some BPM5 current transfers’ items (taxes on production and imports, subsidies and rents), whereas “secondary income” corresponds broadly to ‘current transfers’ in BPM5 plus ‘personal transfers’, which includes all current transfers in cash or in kind between resident households and non-resident households, independent of the source of income and the relationship between the households.

In general, institutional sector and financial assets/liabilities classifications of national accounts are broadly adopted (e.g. “bonds and notes” and “money market instruments” are replaced by “long-term debt securities” and “short-term debt securities”). The sub-sectors of the financial corporations sector are a prime example of the more detailed classification of economic sectors.

Monetary Financial Institutions

S.123 Central Bank

S.122 Other Monetary and Financial Institutions

S.123 Money market funds

Other Financial Institutions

S.124 Non-Money-Market Investment Funds

S.125 Other financial intermediaries

S.126 Financial auxiliaries

S.127 Captive financial institutions

Insurance corporations and pension funds

S.128 Insurance corporations

S.129 Pension Funds

In the context of financial sectors there will be a major shift of holding companies without management activities from the sector of nonfinancial corporations to the financial sector.

Foreign direct investment

The most relevant change in the recording of foreign direct investment (FDI) is the move to the “gross” (assets/liabilities) concept in the standard presentation. This means that all assets of outward and inward direct investments are recorded separately from all liabilities of outward and inward direct investments without any netting according to the direction of the investment. This increases both the net acquisition of financial assets and the net incurrence of liabilities.

Nevertheless, the old presentational style according to the directional principle, in which outward direct investments of the reporting country abroad and inward direct investments of non-residents in the reporting country are recorded on a net basis, will still serve for more detailed analyses. The main difference between the two presentational styles stems from the treatment of “reverse investments”, e.g. receivables of a foreign subsidiary vis-à-vis the parent (in the reporting country). According to the assets/liabilities concept, these receivables are added to the payables of the reporting country, whereas according to the directional principle, they are subtracted from active direct investments.

Financing between fellow enterprises is reclassified in BPM6 from other investment to direct investment. The concepts of direct investor and direct investment enterprise remain broadly unchanged, whereas ‘fellow enterprises’ are those entities under the control or influence of the same immediate or indirect investor, but which do not control or influence each other (i.e. they are not themselves in a direct investment relationship). According to the extended directional principle, the assets and liabilities between fellows are allocated to inward and outward direct investment depending on the residency of the ultimate parent.

Intercompany shares like minor equity positions of the parent held by subsidiaries or fellow enterprises have to be recorded under BPM6. With the exception of loan financing between fellow enterprises, only minor quantitative effects are expected to arise from these changes. Under BPM6, intercompany banking loans, intercompany derivatives and intercompany clearing accounts are the only items that will not be added to direct investments.

In order to enhance the analytical value of FDI data, Special Purpose Entities (SPEs, aka Special Purpose Vehicles, SPVs), i.e., entities owned by foreigners without economic activity whose majority of assets consists of foreign equity holdings, have to be recorded separately. Also, it is recommended that inward direct investments are recorded according to the ultimate beneficiary principle. Finally, it should be noted that there will be a differentiation between Mergers and Acquisitions and other forms of foreign direct investments.

Portfolio investment

In the area of portfolio investment a major change relates to the treatment of accruals in case of mutual funds. All income generated by investment funds shares, irrespective of whether it is distributed or not, is recorded as attributable to shareholders, either as actually distributed income (dividends) or reinvested earnings. (In practice, the treatment of the income generated by investment funds shares is similar to that on foreign direct investment).

Furthermore, the recording of maturities changed: Under BPM6, both original and remaining maturities of bonds have to be displayed. In addition to that, BPM6 requires active portfolio investments to be recorded according to issue currency and economic sector of the foreign issuer.

Other investment

The biggest change in other investment stems from the different treatment of fellow enterprises. As mentioned further above, financing between fellow enterprises is to be recorded under direct investments according to BPM6 and not under other investments as has been the practice until now.

New allocations (or cancelations) of Special Drawing Rights (SDRs) are now recorded as ‘net incurrences of liabilities’ by monetary authorities. Transactions in other equity not included in direct investment (e.g. equity participations in international organizations) are now separately identified in other investment.

Moreover, receivables and payables from provisions for insurances (including reinsurances), pensions and standardized guarantees have to be recorded separately and in more detail. These items should have been recorded indistinctively under other assets/liabilities under BPM5. The same applies for the new BPM6 item other equity (equity not part of direct or portfolio investment like participation in limited liability companies below 10 % of voting rights).

Reserve assets

No relevant changes are introduced with BPM6 on transactions in reserve assets. However, some clarifications are introduced regarding the treatment of gold accounts. The most important change is the breakdown between allocated and unallocated gold (i.e. physical gold vs. gold accounts).